Around 1870, two ragged prospectors made an odd deposit of "precious gems" at an assay office in San Francisco. The miners quickly vanished, but the hoard they left behind triggered a financial frenzy that generated the equivalent of $3 billion in capital investment. Even before the strike could be verified, men made fortunes investing in an astonishing rumor that "blossomed into a craze of speculation worthy of the Arabian Nights."

The prospectors, John Slack and Philip Arnold, were Kentucky cousins whose 19th-century economic wonder rivaled the Internet. Historian Peter DeLafosse has noted the parallels between today's cyber-excitement and the fiscal furor generated when Arnold and Slack arrived in San Francisco with their sack of diamonds, rubies, emeralds, amethysts, garnets and spinels.

The gems came to the attention of William Ralston, president of the Bank of California and the Bill Gates of his time. He tracked down the prospectors in Wyoming and tried to all but swindle them out of control of their discovery. Slack and Arnold agreed to take Ralston's scout to their secret site. Four days' ride south of Fort Bridger, they removed the blindfold from the banker's agent and showed him where they had dug diamonds and rubies out of anthills.

The "discovery" came in the wake of diamond finds in South Africa. Charles Tiffany certified that one sack of these Rocky Mountain gemstones would be worth "a rajah's ransom." Ralston and his syndicate, which included an agent of the Rothschild's and former Union general and presidential candidate George B. McClellan, invested $10 million to move the world's diamond capital from Amsterdam to San Francisco.

Like the Internet with its promise of easy riches, the diamond craze of 1872 created and destroyed fortunes long before anyone figured out if there was any real money to be made. The Kentucky prospectors walked away with some $600,000 (worth $8 million in today's dollars) for rights to their find.

Soon after, geologist and explorer Clarence King deduced the location of the purported diamond fields near Brown's Hole, the remote spot where Utah and Colorado meet Wyoming. At the site, King noted that the only anthills containing the precise 4-1 ratio of rubies to diamonds were those surrounded by boot tracks.The mines were "salted" frauds. Private investigators learned that Slack and Arnold had bought $35,000 in low-grade diamonds in London. Some of the sample gems were cut diamonds. Instead of being remembered as one of the most spectacular mineral discoveries of all time, the scam is now called the Great Diamond Hoax.

The deceit probably inspired the names of Utah's Diamond Mountain and Diamond Gulch, located close by the purported mines. Ironically, brilliant crystals found five miles south of Eureka, Utah, sparked a boomtown named Diamond in 1870, and may have inspired the entire con.

Some say Slack disappeared. Others maintain he made coffins in New Mexico during his last days. Arnold returned to Kentucky to live in splendor, but ultimately coughed up $150,000 to pay off angry investors. Arnold lost a gunfight in 1878 and died of pneumonia. Ralston, the financial genius who sparked the great excitement, lost his job in 1875 following a run on his bank. He took a swim in the San Francisco Bay and didn't come back.
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Will Bagley is a Western historian with absolutely no financial expertise. For more on the hoax, see Thurman Wilkins' biography, Clarence King.